IMF Mission to the Democratic Republic of São Tomé and Príncipe Reaches Staff-Level Agreement on US$3.97 Million ECF-Supported Program

Press Release No. 12/182
May 17, 2012

A team from the International Monetary Fund (IMF), led by Mr. Ricardo Velloso, visited São Tomé and Príncipe during May 4-17, 2012, to discuss a medium-term economic program that could be supported by the IMF under the Extended Credit Facility (ECF).1

The IMF team held warm and fruitful discussions with Finance Minister Américo Ramos and Central Bank Governor Maria do Carmo Silveira and their respective senior staffs. The IMF team also met with other senior government officials, private sector representatives, and São Tomé and Príncipe’s main development partners.

At the conclusion of the visit, Mr. Ricardo Velloso, the IMF Mission Chief for São Tomé and Príncipe, issued the following statement in São Tomé:

“The IMF mission has reached staff-level agreement with the authorities of São Tomé and Príncipe on an economic program for 2012–15 that could be supported by the IMF’s Extended Credit Facility (ECF) in the amount of SDR 2.59 million (about US$3.97 million). The staff-level agreement is subject to approval by the IMF’s Executive Board, which is expected to consider the matter in July 2012.

“The medium-term economic program, anchored by the government’s new National Poverty Reduction Strategy Paper, aims at fiscal, monetary, and financial stability. To achieve these objectives, the program contains measures to keep the domestic primary deficit in line with available non-debt-creating financing, while mobilizing additional domestic revenue for priority infrastructure and pro-poor spending. The program also includes an ambitious and realistic structural reform agenda to strengthen public finances as well as the frameworks for monetary policy, banking supervision, and anti-money laundering.

“São Tomé and Príncipe’s economic performance in 2011 was good despite a challenging external environment. The rebound in economic activity continued and real gross domestic product (GDP) growth last year reached an estimated 5 percent. Inflation continued its downward trend and reached 8 percent (year-on-year) in April 2012, the lowest level recorded in ten years.

“Real GDP is projected to grow by 4½ percent in 2012, reflecting persistent global uncertainties and a slowdown in foreign-financed projects in the first half of the year. But growth is expected to accelerate to 6 percent per year over the medium term, reflecting an expansion in tourism, agriculture and construction.

“Annual inflation is projected to decline to low single digits by 2015 supported by the peg of the Dobra to the Euro, cautious government wage and price policies, continued fiscal prudence, and a vigilant and effective central bank.

“The IMF mission praised the authorities for their commitment to preserve hard-won fiscal prudence. It agreed with the government on the need to avoid commercial borrowing and instead focus on grants and highly concessional loans to finance development programs given São Tomé and Príncipe’s still fragile external debt position.

“The domestic primary deficit will decline to 3 percent of GDP by 2014 through a combination of non-priority expenditure restraint and tax base enlargement. Customs and tax administration modernization is expected to create fiscal space for higher priority infrastructure and pro-poor spending.

“The IMF mission stressed the importance of finding a credible solution to the long-standing issue of cross-arrears between the Treasury, the state-owned water and electricity company, EMAE, and oil product importing company, ENCO. This will involve reconciling and certifying the stock of unpaid bills and unpaid fuel taxes, proposing an orderly clearing of those arrears, and developing a realistic plan to avoid this problem from recurring.

“The IMF mission welcomed the beginning of operations of the credit reference bureau. It also praised the central bank’s continued efforts to de-dollarize the banking system and its success in requiring unprofitable banks to raise capital and all banks to raise their capital-to-risk weighted assets ratio to above 10 percent.

“While the IMF mission noted that in 2011 most banks turned a profit and credit growth slowed from the breakneck pace of the previous two years, it advised the central bank to monitor closely the effects on bank profitability and capital of the recent increase in non-performing loans, from 15 percent in September 2011 to 21 percent in March 2012.

“The central bank carried out on-site inspections of two commercial banks in 2011. The IMF mission encouraged the central bank to proceed as planned with two more on-site inspections in 2012, and to complete on-site inspections of the remaining three commercial banks in 2013.

“The IMF mission noted the authorities’ strong commitment to addressing the deficiencies of São Tomé and Príncipe’s anti-money laundering framework. This will include drafting the necessary amendments to the anti-money laundering law and sending those amendments to the National Assembly for approval, if possible, by end-2012, and strengthening the operations of the Financial Intelligence Unit with additional staff and training.”

1 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the IMF’s main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years.